From Savior to Slayer: How CBDCs spell the end of banking

Witness the clash of titans as Central Bank Digital Currencies go head-to-head with cryptocurrencies in a battle for dominance.

From Savior to Slayer: How CBDCs spell the end of banking
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Central Bank Digital Currencies have made the rounds the past years, almost as if they were the iPhone of Central Banks. Every central bank wants one, every central bank needs one. But in the end, there can be only one. One CBDC to rule them all!

Origin of Blockchain

Blockchain came up over 40 years ago, as a concept to make sure that suspicious parties could trade with one another. And if you have ever done business, you will know that the bedrock of capitalism is to screw the other guy over before he can screw you over. And to not discriminate, you can add your preferred gender to the list of scumbags, if you feel it needs to be more inclusive.

Like most other technologies, blockchain was a topic for those hiding in the darkest corners of the planet. A place where the mandatory work uniform is a washed-out hoodie, with grease stains. Yes, I am talking about IRC channels, and university campuses.

For the longest time, nobody outside these circles cared about blockchain. That is until 2008. When the economy collapsed, scores of people had lost everything.

As you may imagine, seeing people homeless puts many others on the defensive, and creativity abounds.

Out of the bailouts and the resulting inflation, rose the phoenix. The shining light of those looking to trade online without Big Brother watching. Bitcoin. That is not to say that Bitcoin was a reaction to the crisis, but the crisis did help the adoption of Bitcoin in the wider community.

Now I could go into the history of Bitcoin and how awesome it is, or how terrible it is, but I won't do that. There's enough Gold Bugs from the old Austrian school and enough crypto fans to teach you all you never wanted to know about crypto.

The CBDC Hype

I should mention at this point, that while many CBDC solutions are blockchain based, CBDC itself does not require blockchain. This is a mere convenience feature.

So what are CBDCs? And why governments seem to love them perhaps a little bit too much?

CBDCs are the equivalent of digital money. And to some extend we already have that today, with people using credit cards and smart phones for payments. But they are a bit more than that.

If you'd look closer, you'd notice that CBDCs are a bit more like coupons than money. While you are free to spend money any way you like, that Amazon Coupon expires after a certain number of days, and you can only use it to shop with Amazon or partner shops. The caveat here is that central banks have a wide array of partner shops.

While many will focus on the surveillance aspect of CBDCs, one of the biggest goals of CBDCs is tackling montary policy. Remember the expiration date on the coupons? By being able to adjust the timer on your digital money, the banks can choose whether to stimulate consumer spending or saving.

They would also be a major aid in law enforcement. It would also allow central banks to reduce consumption of illicit substances or morally questionable vices. CBDCs could also be used to prevent gun violence, by restricting access to ammunition. Further it could help with tracking down known criminals, or even prevent them from using their financial assets, while the investigations are ongoing.

And of course, it would help with other nuisances that banks have to deal with, such as payment settlements, capital flows and preventing bankruns.

Critique of CBDC

Now I could go into the whole common critique here, about how this could become Orwellian, but there's enough people shouting about this online already.

I will take a different approach and discuss why I find that CBDCs are unimplementable. I will discuss why I believe this is yet another Ivory Tower idea, that is doomed to fail. But unlike other Ivory Tower ideas, this one will take the banking system down with it.

CBDCs start from the perspective that there is a right way to use resources, and there is a wrong way to use resources, and that there is this concept of ethics out there that somehow is universal and everybody agrees on. And the court of law is of course the final arbiter of all that, and once it's all put on paper, it becomes law and of course people will stop doing bad things.

To paraphrase Plato: Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.

And there already begins the problem. CBDCs do have amazing potential to help with payment settlements, and facilitate ease of trade. And if central banks focused on this layer alone, we may find that very few people would object. After all, the infrastructure used by banks today to handle payments, would have been considered antiquated by Herodot himself.

Payment settlement systems are intricate machines that have worked in automated and regulated fashion for almost half a century. All these systems will need to be migrated. The migration work alone, is an IT infrastructure nightmare. IT migrations always bring problems to the surface that had been buried deep. Some forgotten line of code, some obscure configuration file...

To give you an idea of what kind of repercussions poor IT migrations can provoke, look no further than the IT system migration of the Royal Bank of Scotland.

And on top of that, the blockchain struggles with scaling, thus it couldn't handle the abusive demand of large payment systems.

From a law enforcement perspective, the CBDC is worthless. The result would be a parallel economy. The results would be much the same as with the prohibitions or the war on drugs. People would buy goods, and trade the goods instead. Perhaps they will buy actual Amazon coupons. Who knows?

As a side-effect, the Central Banks would stimulate the growth of black market trade. And once people begin dealing in the black market, what's buying yet another product? People that before would never had considered buying drugs, for fear of committing a crime, may now be more open to experiment.

By extension this would fill the pockets of the black market sellers, which could then build fantastic wealth through money laundering. This fantastic wealth could then be used to obtain political advantages and eventually seize control of the country that was foolish enough to drive customers to them. And now all those control tools, would be used against the former heads of the central banks.

Life has a way to solve problems through irony. And this will be no different. Once more the old saying rings true, that you can't escape that which you fear.

So, if the CBDC can't solve any problems for the public, but only cause new ones, then what is the point of CBDCs to begin with?

It is true that at some point or another, the world will need to find a common currency to facilitate trade, but just like Esperanto failed to establish itself as a language, so too will these CBDC solutions fail.

The true currency of the future, will emerge from the ashes of the failed CBDCs. A true one world currency, alas without all the fancy features of the central banks. For why do we need resellers of something that is available to all for free? And what are banks if not resellers of currencies?

Perhaps the most ironic part about this, is watching the very people drive this topic forward with such zealous vigour, dig their own graves. They deny at every turn the possibility of what I just outlined. They tell me, there will be systems in place to prevent all of that. That's right! There's rules in place to stop people that ignore rules from breaking the rules. So we can all rest assured now.

Implications of CBDCs

And how does all this affect the economy today? Probably less, than some will have you believe. For the most part, the entire shift would be seamless. Depending on how draconian the initial measures will be, and how much outrage they will stir, we will know how long these currencies have to live.

Indeed, for a CBDC to survive, it needs to return to a model that allows for more privacy and more stability than Bitcoin provides today. And by doing so, most of the other features that were in the initial scope of the CBDC will be lost.

Irony seems to have no limits. CBDCs were to be set up, to prevent crypto currencies from taking over, and to ensure that banks retain control over the currencies. Instead the central banks will make themselves obsolete by creating the most secure and reliable payment system ever created, that requires no intermediary.

A system that would work

For all the flaws humans have, they can also be wonderful. And we know, that micromanagement doesn't work, even if it were controlled by AI. So why do we have more and more laws that seem to engage in micromanagement?

However, there is a system that would work.A well thought-out law will create trust where there is none.

Such a law, will accept that humans are flawed. They will be envious, greedy, lustful, lazy, angry, vain and they seem to never have enough. A good law would accept that people do these things out of self-interest, and help turn these negative traits into positive traits.

The purpose of laws is to incentivise people to build a future for themselves. If you would have to worry every day about having to start over, there wouldn't be much of a point in building a home, or growing crops. Why bother? Someone else would take it from you, without having invested any effort.

We can see the result in how people change their behaviour between renting and owning a home. Tenants will use the house, until it has rotted around them. Home-owners will invest in building a beautiful house for themselves and their children.

Poor laws will prevent people from building a future for themselves.

To a certain degree, that is how capitalism works. It leverages all of these nasty habits into features to drive the economy forward. The problem is that many of the checks and balances we used to have in place that prevented the system from auto-cannibalizing, have not been enforced or have been abolished.

A good law does not require two people entering a contract to be virtuous. It will ensure the validity of the contract regardless.

As humans have as of yet been unable to draft an entire legal system around these principles, it may be time to leverage AI in this pursuit. It can help us develop game theoretical models that operate as a fall-back mechanism for situations when social contracts fail to work.


While the idea of CBDCs may seem appealing on the surface, it's important to remember that what goes around comes around.

So while others concern themselves with their dystopian view on how CBDCs will ruin everything, I believe that the power of randomness will make such a dystopian future, unimplementable.

And remember, while technology can offer new tools and solutions, it's up to us to decide how to use them.

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